Flow-Driven ESG Returns

Swiss Finance Institute Research Paper No. 21-71

Winner of the Swiss Finance Institute Best Paper Doctoral Award 2022

71 Pages Posted: 21 Oct 2021 Last revised: 7 Nov 2022

See all articles by Philippe van der Beck

Philippe van der Beck

Ecole Polytechnique Fédérale de Lausanne

Date Written: September 23, 2021


The returns from sustainable investing are strongly driven by price pressure from flows towards sustainable funds, causing high realized returns that do not reflect high expected returns. Using a structural model, I estimate investors’ ability to accommodate the demand from sustainable funds, which is given by their elasticity of substitution between stocks. I show that every dollar flowing from the market portfolio into sustainable mutual funds increases the aggregate value of green stocks by $0.4. The price pressure from flows supports the effectiveness of impact investing by lowering green firms’ cost of capital. In the absence of flow-driven price pressure, sustainable funds would have underperformed the market from 2016 to 2021. To this end, I develop a new measure of total capital flows into managed portfolios. The price pressure from total ESG flows is highly correlated with empirically observed returns, both in the time-series and in the cross-section. I support the structural estimates with reduced-form evidence, showing that index inclusions and mandate-driven portfolio additions by sustainable mutual funds significantly boost the prices of green stocks.

Keywords: sustainable investing, ESG, price pressure, flows, demand elasticity

JEL Classification: G11, G12, G23

Suggested Citation

van der Beck, Philippe, Flow-Driven ESG Returns (September 23, 2021). Swiss Finance Institute Research Paper No. 21-71, Winner of the Swiss Finance Institute Best Paper Doctoral Award 2022, Available at SSRN: https://ssrn.com/abstract=3929359 or http://dx.doi.org/10.2139/ssrn.3929359

Philippe Van der Beck (Contact Author)

Ecole Polytechnique Fédérale de Lausanne ( email )

Quartier UNIL-Dorigny, Bâtiment Extranef, # 211
40, Bd du Pont-d'Arve
CH-1015 Lausanne, CH-6900

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